The deal, which Fitch did not rate, suggests there is potential for Shari'ah-compliant SF to develop in the UK and other jurisdictions where SF is already an established funding tool. How far this happens will be determined by the level of investor appetite, originators' desire to use Shari'ah-compliant funding, and the potential growth of the underlying assets, such as HPPs.

Fitch said that developing asset-backed Sukuk where there is no pre-existing SF market would be much more challenging. This is even though structuring techniques commonly used in SF may be Shari'ah compliant as the true sale of assets to an issuing SPV would be suited to the core Shari'ah principle of profit and loss sharing.

However, in the absence of an established SF market, the question of whether the true sale would be effective and underpin core securitisation principles will be untested. These principles include the creation of legal, valid, binding and enforceable security interests, bankruptcy remoteness, the use of perfection mechanisms to complete the transfer of legal title prior to enforcement, and the recognition of foreign law.

The majority of Sukuk issued to date are originator backed rather than asset backed, meaning that investor recourse to the underlying assets is specifically excluded and they instead rely on features designed to ensure an obligor's direct support and on contractual commitments built into transaction documentation.

Even in an asset-backed Sukuk where the assets did constitute collateral, the local legal environment may hinder or prevent significant, timely and predictable recoveries due to the absence of a clear legal framework for enforcing creditor rights. We believe this is lacking in many of the top 10 Islamic finance jurisdictions, unlike in developed SF markets. This may be why most Sukuk issued in the major Islamic finance markets have been senior unsecured instruments.

It may also prevent Fitch from forming an opinion on the enforceability of an investor's rights in relation to the underlying SF assets regardless of whether an SF deal is Shari'ah compliant or a conventional SF instrument. We would typically rate asset-backed Sukuk according to our established structured finance criteria.

Shari'ah-compliant SF is likely to remain a niche product even though the Islamic finance market will continue to grow globally—new Sukuk issuance with a maturity of more than 18 months from the GCC region, Malaysia, Indonesia, Turkey and Pakistan grew by nearly 50 per cent yoy in 2017.